I’ve gotten several requests from readers to provide advice to young lawyers who seek financial independence / early retirement (FIRE). The urge to FIRE often strikes early in a young lawyer’s career — sometimes just months after graduating from law school, despite having paid a high price to become a lawyer. Other times the urge strikes years later, when striving to climb the ladder just seems futile.
For those readers who are not lawyers, let me put help provide some perspective for you. Many law students attend law school as a default decision, without much thought to whether they would actually enjoy practicing law. It is not uncommon for folks to matriculate into law school with dollar signs in their eyes, due in large part to the misinformation about median salaries disseminated by the law schools themselves. Students generally apply to law firms at the beginning of their second year of law school for summer associates positions. Among law students, getting a Biglaw summer position is the holy grail so many students seek it out simply because it is held in such high esteem. For those lucky enough to get offers, they are wined and dined over their 2L summer — life is still good. Reality kicks in the fall after graduating law school, when they finally become lawyers. At that time, they are thrust into a fast-paced, sink-or-swim situation where they are expected to 60+ hour weeks and make themselves available 24/7 to satisfy the whims of partners and clients. These young lawyers are fish out of water and typically do not know how to present themselves in a law firm. Of course things get a little better over time as they adapt to their harsh environment — just as a big-firm lawyer can be trained as a drone, a captive elephant can be taught to stand on its hind legs. By the time an associate is a mid-level, they generally know how to do the work. But at this stage, work can feel like the movie Groundhog Day where Bill Murray lived the same day over and over and over again. Nothing is new anymore. The drudgery is like a broken record. A few more years pass. Now that once-young lawyer is an out-of-shape senior associate or junior partner. The pressure continues to build, as they are expected to originate work and manage teams to do work they don’t even care about themselves. At some point, whether it’s the first few months out of law school, or years later, many lawyers are bound to lose it and decide leave the law.
Many who leave end up wasting the incredible financial opportunity that working at a law firm can provide. Instead of being financially prudent, they wastefully spend their high salaries on material items that fail to provide any satisfaction or meaning. That’s called the golden handcuffs. The first part of the guide is intended to help Biglaw lawyers manage their finances. Some lawyers do not make it that far and are asked to leave early in their careers. The second part of the guide is intended to help young lawyers last as long as they wish in a Biglaw environment.
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Financial Advice to Young Lawyers
Biglaw salaries are pretty generous, especially for a 25-year old fresh out of school. Base salaries generally start at $160K with a $15K bonus. As an associate gets more senior, the salary and bonus will increase along a scale set by the largest firms. An eighth-year can generally expect a base salary of $280K and a bonus of $60K-$100K.
The key to attaining financial independence is to sock away as much of that income as possible. Live like a law student. Financial independence can be attained if one has saved at least 25 years of living expenses. That’s the bare minimum. Many would advocate having at least 33 years of expenses saved. Now if you can save 50% of your take home pay, then that means you are saving one year of expenses each year. That’s great if you compare yourself to the average millenial, but even with the power of compounding, it will still take more years than you’d probably like to declare financial independence. Every young lawyer should do whatever it takes to get expenses down in order to save more. You kill two birds with one stone. Let’s say Mary takes home $100K and saves $50K. That means she spends $50K a year. If she can cut down her spending to $25K, that means she can save $75K. She’s gone from saving one year of expenses to saving three years of expenses. Jacob from ERE explained the concept really well. MMM also derived a post from Jacob.
Here are some practical tips for Biglawyers to save a little extra:
- Live with roommates. This applies especially to those lawyers who live in expensive areas. It is not worth paying $2500 to live in a studio when you can pay $1500 to live with 2 roommates. Again this kills two birds with one stone. Biglaw is isolating enough. Reduce your feeling of isolation by having people around. Even when I was a 6th year, I had two roommates and I only paid $1200 a month in rent. The going rate for a 1 bedroom in my area is between $2000 and $2500. That’s a savings of up to $15K a year.
- Live close to the office. Biglaw is very demanding. Live close to the office so you can get there without any hassle. Don’t be the first year that lives outside the city and has to leave at 6:30 to catch the train/bus. Don’t be the person who lives an hour away and is constantly disgruntled when asked to stay late. If you are not busy, living close gives you the option to go home in the middle of the day. If you are busy, then living close means you don’t have to sleep under your desk.
- Don’t take on big liabilities. Be wary of buying a house if you need your salary to pay the mortgage. We have a first-year who is in the process of buying a $700K house. I feel sorry for him. Not only is it 5x his salary, but it is also 35-minutes away from the office. If he were to lose his job or want to quit, that house will be an albatross around his neck. Avoid it.
- Reduce recurring expenses. Drop cable and get Netflix. You will be too busy to watch TV anyways. Unless your firm pays for all cell phone costs, use a low-cost cellular provider. My firm only covers data. We use Ting, which costs us $40 for 4 smartphone lines. Ting charges based on how much you actually use. I make most of my personal calls from work or Google Hangouts and use Wifi for most of my data. AT&T and Verizon would probably charge $150 to $200 a month. You should probably have a gym membership though. But skip Equinox and join Gold’s Gym or 24 Hour Fitness instead. You don’t need towel service. The recurring expenses really add up.
- If you plan to get married, make sure you are on the same page as your spouse-to-be. Make sure your spouse-to-be has the same financial values and goals as yourself. Some people are attracted to high-earning folks such as yourself because they want to live a luxurious lifestyle. Avoid these people at all costs. Get a prenup — it’s worth the peace of mind. If things don’t work out (because you are working too hard and never home), you don’t want to have a court order you to pay alimony commensurate to a Biglaw salary even after you have quit Biglaw.
- Minimize your taxes. Max out that 401(k) every year. If you are healthy, sign up for a high deductible health plan to take advantage of the HSA. You can deduct your contributions from your income. Max out your Roth IRA contributions — use the backdoor if necessary.
- Invest, invest, invest! Don’t let your hard earned money sit there. After you pay off your loans, invest what’s left. Use something like a three-fund portfolio that is low in cost. Set-up an automatic investment plan. You want this to be as hands off as possible as you will be busting your butt at work.
- Automate all of your expenses. Autopay your credit card bills. Auto transfer your paycheck into savings, debt payments, investments, etc. Don’t spend too much time tinkering with your expenses. You should never write out a paper check again. Use PayPal to pay friends and family. Set-up bill pay to pay your rent.
- Try not to drive. Chances are you work in a big city. You don’t need a car. If you live in the ‘burbs, try to reduce your driving. If you live with a spouse, get down to one car. Cars can be more expensive than you would think between depreciation, gas, maintenance, etc. Check out the True Cost to Own calculator to get an idea of how much driving actually costs.
- Take advantage of firm perks. Does your firm offer dinner (e.g., Seamless) after a certain hour? What about taxi rides?
- Use rewards cards wisely. My firm requires us to charge firm expenses on our own cards and get reimbursed later. In the past few years, I have expensed over $250K to the firm. Most of that has been for travel, but some of expenses relate to purchasing product samples to analyze. I typically charge these expenses to rewards cards, either to meet a minimum spend to get a bonus or to earn whatever points they are offering per dollar spent. Sometimes you can stack with rewards sites like Fatwallet and or retailer sites like Rakuten.
- Resist the urge to treat yourself simply because your job sucks. You can treat yourself but make sure you are not hurting your long-term goals. Watch the comfort snacking too!
- Take stock of your spending at least once a week. Track it using Mint and keep it up to date.
When I was in NYC, I got my expenses down to $25K a year. This was in the early 2000’s so it might not be possible today. We’re in CA now and we spend about $45K for two people. Before I got married, I was spending about $30K a year and living with 2 roommates. At one point, I was saving 85% of my take-home income. By no means did I deprive myself. For special occasions, we ate at Michelin-starred restaurants and we traveled often. Push yourself to find your own limit.